Watch for potholes Unlike GM, Ford sticks to European market

Ford ruled out a departure from Europe, emphasizing it will not follow in GM’s footsteps despite wild swings in profitability. But earnings now stand a good chance of rising, says a senior executive.
Still waiting for takeoff.

Last year, Ford’s auto business in North America had an operating margin of 8 percent, a very decent number. Its European subsidiary, on the other hand, earned a meager 0.8 percent on its car sales. This meant that Ford Europe, the carmaker’s biggest business outside North America, eked out an operating profit of just $234 million (€191 million) on sales of $29.7 billion.

Gunnar Herrmann, the boss of Ford’s plants in Cologne and an executive at Ford Europe, is fully aware this has to change. “We face the same external pressure as Opel and all other producers. We want to reach an operating margin of 6 to 8 percent, and then we’ll be healthy,” the 58-year manager told Handelsblatt.

Opel has been loss-making since 1999. Because the bleeding wouldn’t stop, GM sold the German-based subsidiary last year to French peer Peugeot-Citroen. Mr. Herrmann, an engineer by training, said that was not an option. “Selling Ford Europe would be quite difficult and expensive. I would rule that out,” he said. “GM was able to sell a separate brand, Opel. At Ford, that’s not possible, meaning a similar move is tough.”

03 p19 Ford Europe's volatile earnings-01

Ford set up its European subsidiary in 1925 and now operates 16 of its 61 plants in Europe and employs 54,000 on the continent, more than a quarter of its global workforce. The business made a $1.2 billion profit in Europe in 2016 and reached a margin of 4.2 percent, but its profitability has been volatile. Ford Europe lost $4.3 billion from 2011 to 2014 as the continent's debt crisis hit demand, prices fell due to overcapacity, and restructuring charges to close down plants weighed on earnings.

“The past 16 years we’ve experienced a roller-coaster in terms of earnings. That’s a situation that has to change,” Mr. Herrmann said.

Ford Europe would be able to lift earnings by reducing expenses on raw materials, overhead and research and development, Mr. Herrmann said. “Through 2022, I don’t see a reason why we couldn’t be profitable,” he added. Cost-cutting has gotten even higher priority due to Brexit, which triggered a drop of the pound versus the dollar and a charge of $600 million last year, he said.

Stefan Menzel writes about the auto industry focusing on Volkswagen. Gilbert Kreijger is an editor with Handelsblatt Global. To contact the author: menzel@handelsblatt.com and kreijger@handelsblatt.com

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